Cloud computing is hailed as the next “big thing” and is driving a once in a lifetime shift in computing that will reshape businesses across industries. Ben Gossack, Portfolio Manager and Global Technology Analyst, TD Asset Management, highlights the companies that are racing to win the cloud space and the investing opportunities for investors.
I'm Kim Parlee.
Thanks so much for joining us tonight.
We are going to get our heads in the cloud-- cloud computing, that is.
As we just heard, all the tech giants are trying to get the lead in the cloud space.
Now, a lot of us have heard of iCloud and Google Cloud, but do you really know how it works?
Well, according to one survey, most Americans aren't as familiar with technology as one would think.
In fact, half of Americans, 51%, believe that stormy weather interferes with cloud computing.
That was taken a few years back, but I'm not sure if we understood the cloud anymore then than we do now.
Here to bring the cloud back down to earth and explain how it all works is Ben Gossack.
He's Portfolio Manager and Global Technology Analyst at TD Asset Management.
Nice to see you.
Thanks for having me back.
Stormy weather doesn't interfere with cloud computing.
Well it doesn't interfere with cloud computing, but sometimes I wonder if my internet speeds slow down because it's raining or it's windy outside.
You've been practicing that, haven't you?
Actually, I love the fact that we're taking some time here to talk about this because I actually talk about this and say, oh, it's cloud computing, revenues are up because of it.
But what is it, how does it work?
And I think if people can understand what it is, they can start thinking about how to invest better around this.
So that's really the purpose of what we're doing today.
What is the cloud?
So there's two ways to sort of answer that question.
One is the origin of how we got the word cloud and the other is the business model that makes up the cloud.
So going back to its origin, when engineers were designing networks-- so that's a collection of servers and printing devices and storage devices-- they'd get it down to the fine detail of all the wiring, but if there was a connecting network they didn't want to define it so they kind of drew a little bit of a bubble and that's how we got the word cloud.
So it's an external network.
The business model that we see for the cloud is largely driven by Amazon.
They had a bit of a resource problem so they have all these engineers that are trying to design really interesting things, but they have a central office for IT.
And so there was a lot of surfer action between the two, so you decided to break their computing into little LEGO blocks.
So if you take LEGO blocks you can build a spaceship, you can build a castle, it's all the same components.
So if you take computing, you take storage, you let the engineers decide how to put that together rather than try to figure out what engineers needed to build their applications.
So what would be some day to day examples, then, of actually how we would know it or we use the cloud maybe without even knowing that we're using it.
So we're constantly touching the cloud.
If you think-- again, going back to that definition a connected network outside of my home-- the internet could be one really big cloud and there's many clouds that we touch on a day to day basis be it Netflix, Office 365, Dropbox, Gmail.
What's really amazing about the cloud is that let's say you left your home and you left an important file on your computer, it was kind of isolated to that home network and it was a frantic calling people to try to find a way to get that file to you.
With the cloud, because it's external, you can access any file, any photo, any device anytime.
That means you can watch shows on your phone, pick it up where you left off on your tablet.
It provides that convenience.
I love this next chart, and especially because what it's titled.
And I probably love the title more than I love the chart, but you're going to explain the chart, a once in a generation shift in IT architecture.
This was a big deal to get things out from where they were, like you said, on your home computer, to just out where you can always access it.
And this is going to happen once.
So we've kind of done this-- we've done this once, we're in the process of doing it now.
The world is in this middle box with the dotted line.
They term this the second platform.
We got there from the mainframe, so in the '70s and '60s they had these big computers that used to take up floors.
When we got the PC, we moved to the second platform and we unleashed a lot of productivity, we created applications, and we made professionals be able to be very productive with millions of people using these applications.
But now with smartphones, with tablets, with the internet of things and many connected devices, we need a new platform.
That's being sort of generated by the cloud.
It's almost, if you think of it, all of the devices are just shells and then all the content comes from everywhere else.
So you just have to be able to read it, if you will.
So now instead of millions of people, every person has got a smartphone so now we're into billions of people.
We're going to have billions of sensors out and around the world.
We need an agile platform that can scale, that can take all that data that we want to analyze, and then make business decisions based on that.
I want to let people know that we're eventually going to get to the part of the conversation where I say, great, as an investor how do you play this?
And we're going to get there.
Bear with me, though.
I know my producer wanted me to ask you this.
You've got a company, let's say, that makes customized dress shirts.
Lets just say that's your company.
Why do I care about the cloud?
So if I was going to start a company that make customized dress shirts-- Yeah.
And I like your shirt, so I think it's a good start.
So let's say its my own shirt that we made in this business.
I want to be able to grow, that means I need a lot of systems.
I need to be able to accept orders, I need payment processing, I need a database of my customers.
This takes a lot of infrastructure to support all that.
So I may be able to raise some money, but a lot of that money is then going to be paid for hardware and for professionals to run all that infrastructure for me.
When we're moving into the cloud, I can save a lot of money because I'm going to be outsourcing it to someone else.
I think we have a chart that sort of shows the shift.
Let's being it in.
So this is IT infrastructure in a cloud world.
Let's take a look at this one.
I guess one of those things, too, it just seems to get rid of a lot of fixed costs in the system for a lot of these businesses that are starting up.
So all this capital would have been capital expenditure.
So when we go back to the Amazon example where they broke up computing into LEGO boxes, you can think of these stacks as different LEGO pieces of computing.
So in our dress shirt example, we're going to be on the far left hand column.
As the owner of the business, I'm responsible for all the layers of computing and I need to find the right hardware and all the professionals to deal with that.
But I'm in the business of selling shirts.
So with the cloud, I can outsource a lot of that infrastructure to someone else.
So now you can see what the yellow LEGO blocks, that's the part that will be owned by a cloud provider.
So there's three different flavors of the cloud.
There's infrastructure, there's platform, and there's software.
And you can see with software it's all yellow blocks.
That means I don't need to worry about anything.
I'm getting an application run by a sophisticated cloud vendor and I can run it off my app or off my browser.
So in a way, what the cloud has done is it's democratized IT.
So I can be a small business owner and I can get very sophisticated software that would have been only available to people with deep pockets.
For a price, and that's what we're going to talk about, right?
Because you're paying for the service and then the companies that run it get the revenues.
So that's what we're going to be talking about when we get back.
We're talking with Ben Gossack.
We're talking cloud computing and we're taking a look at the investing perspective on cloud computing right after this.
We're back with Ben Gossack from TD Asset Management.
We're talking the cloud.
He just talked to us about of all the kinds of services that are available to people in the cloud-- the LEGO blocks, as it were, that people can buy-- or not buy, rent if you want-- As a service.
As a service, yes.
Is it too early for investors to get returns from the cloud computing space?
We're still in the early innings.
So Amazon started their first services to the public in 2006.
So if you think about it, we're 10 years in.
Enterprises have been very slow to shift their workloads to the cloud.
So the data that we have is that 20% of applications for companies like Coca-Cola, Johnson & Johnson, GE have moved to the cloud so that means 80% is still happening on their promises.
So there's still a ways to go.
There's still a lot of uncertainty as to who will be the winners, who will be the losers.
But having said that, there are still some plays that you like right now and I want you to explain why.
So who would you pick as winners in the cloud space so far?
So if we look at information technology, we break it up into subsectors.
So we have software, we have hardware, we have services.
We think the cloud provides big opportunity for the cloud vendors.
If you think about Microsoft Office, if I was a company to buy it, it's probably 20% of my total cost to actually operate it.
So again, I need hardware, I need people to manage it.
So if I'm offsetting that off to Microsoft and taking it in as a service, in theory my total cost of ownership has fallen.
So I'm happy as a customer.
But Microsoft is taking on that burden and so in theory, they could charge more for that subscription.
So we think it's a huge addressable market that grows for the software companies.
We think that benefits companies like a Microsoft or an Oracle.
Now, talk a bit more about Oracle.
You used Microsoft, as an example.
How does Oracle benefit in the same way?
The same thing.
They do a lot of applications, they're able then to serve that over the internet.
Oracle is known as sort of the Cadillac of databases.
So again, for a lot of up and coming companies that couldn't afford that Oracle database, in the cloud it's a model that small and medium enterprises can now get that sophisticated software that they would have been priced out of before.
What about Amazon?
I mean we hear cloud and we hear Amazon together quite a bit in terms of who uses it, but also who's providing those services I know, too, that their web services, I believe, to a lot of small companies.
So how does that work?
I mean we like Amazon.
Right now I'd say they're the distant leader in the cloud, followed by Microsoft and Google.
So we like it for its disruptive e-commerce, for its Prime delivery services, for video, especially its Amazon Web Services.
So what we're looking for that company, that they own that infrastructure space which is all the hardware and the servers.
And so we're trying to watch them and see how they move up the stack and that could be disruptive for other players.
Last one here, a name you've got, ticker symbol EQIX on the NASDAQ.
And this is a data center.
It's a data center.
It's called Equinix.
And what we like about it is that we're trying to figure out who wins, who loses but we also have to think about how companies will connect to their cloud providers.
So they may use SalesForce.com for their customer relationship management tools, they may use Microsoft for Office 365.
Equinix is kind of like the Switzerland of data centers.
So they don't belong to an Amazon or a Verizon or a Bell.
It's a place where everyone can put their servers and then the customer can then run a line from their server to whoever is providing them the cloud.
We think that's the most efficient way to get your services.
Is this like a massive server farm?
Is that what I'm visualizing?
I kind of think of it as a storage unit center, a mall.
So if I'm going back to school shopping, it's one stop shopping.
I can do everything in one spot.
An example would be let's say you want to do a stock trade on your phone, you're going to need many different parties.
You're going to need Bell for your network, you're going to need TD Waterhouse for your brokerage, you're going to need the stock exchange, several other players.
If it's all happening within the data center, it can be very efficient in terms of routing that order that you put in your phone.
Who's going to lose as the cloud gets bigger?
So if the customer is happy because they're spending less and the software players can make more money, we think that comes at the expense of hardware vendors and select IT service companies.
So now there's less enterprise customers for the hardware companies and you've concentrated negotiating power to the Googles and the Amazons and the IBMs.
So we're not surprised that we see really big transactions like Dell and EMC combining.
They're going to have to do that.
And then anyone that was supporting the on-premise environment implementing large applications like SAP, that business is also suffering right now.
Ben, always great to have you here.
Thanks so much.
Ben Gossack, Portfolio Manager and Global Technology Analyst with TD Asset Management.